Johnson and Johnson 2011 Annual Report Download - page 56

54 JOHNSON & JOHNSON 2011 ANNUAL REPORT
14. International Currency Translation
For translation of its subsidiaries operating in non-U.S. Dollar cur-
rencies, the Company has determined that the local currencies of its
international subsidiaries are the functional currencies except those
in highly inflationary economies, which are defined as those which
have had compound cumulative rates of inflation of 100% or more
during the past three years, or where a substantial portion of its
cash flows are not in the local currency.
In consolidating international subsidiaries, balance sheet cur-
rency effects are recorded as a component of accumulated other
comprehensive income. This equity account includes the results
of translating all balance sheet assets and liabilities at current
exchange rates, except for those located in highly inflationary
economies. The translation of balance sheet accounts for highly
inflationary economies are reflected in the operating results.
An analysis of the changes during 2011, 2010 and 2009 for
foreign currency translation adjustments is included in Note 13.
Net currency transaction gains and losses included in Other
(income) expense were losses of $10 million, $130 million and
$210 million in 2011, 2010 and 2009, respectively.
15. Earnings Per Share
The following is a reconciliation of basic net earnings per share to
diluted net earnings per share for the fiscal years ended January 1,
2012, January 2, 2011 and January 3, 2010:
(In Millions Except Per Share Data) 2011 2010 2009
Basic net earnings per share $ 3.54 4.85 4.45
Average shares
outstanding — basic 2,736.0 2,751.4 2,759.5
Potential shares exercisable
under stock option plans 158.3 156.1 118.0
Less: shares repurchased
under treasury stock method (122.6) (122.3) (92.0)
Convertible debt shares 3.6 3.6 3.6
Adjusted average shares
outstanding — diluted 2,775.3 2,788.8 2,789.1
Diluted net earnings per share $ 3.49 4.78 4.40
The diluted net earnings per share calculation includes the dilutive
effect of convertible debt that is offset by the related reduction
in interest expense of $4 million after-tax for years 2011, 2010
and 2009.
Diluted net earnings per share excludes 51 million, 66 million
and 121 million shares underlying stock options for 2011, 2010 and
2009, respectively, as the exercise price of these options was
greater than their average market value, which would result in an
anti-dilutive effect on diluted earnings per share.
16. Rental Expense and Lease Commitments
Rentals of space, vehicles, manufacturing equipment and office and
data processing equipment under operating leases were approxi-
mately $313 million, $299 million and $322 million in 2011, 2010 and
2009, respectively.
The approximate minimum rental payments required under
operating leases that have initial or remaining non-cancelable lease
terms in excess of one year at January 1, 2012 are:
(Dollars in Millions) After
2012 2013 2014 2015 2016 2016 Total
$188 162 131 104 82 65 732
Commitments under capital leases are not significant.
17. Common Stock, Stock Option Plans and Stock
Compensation Agreements
At January 1, 2012, the Company had 4 stock-based compensa-
tion plans. The shares outstanding are for contracts under the
Company’s 2000 Stock Option Plan, the 2005 Long-Term Incentive
Plan, the 1997 Non-Employee Director’s Plan and Scios, Inc. Stock
Option Plans. During 2011, no options or restricted shares were
granted under any of these plans except under the 2005 Long-Term
Incentive Plan.
The compensation cost that has been charged against income
for these plans was $621 million, $614 million and $628 million for
2011, 2010 and 2009, respectively. The total income tax benefit
recognized in the income statement for share-based compensation
costs was $207 million, $205 million and $210 million for 2011,
2010 and 2009, respectively. The total unrecognized compensation
cost was $562 million, $613 million and $612 million for 2011, 2010
and 2009, respectively. The weighted average period for this cost
to be recognized was 0.97 years, 1.05 years and 1.16 years for 2011,
2010, and 2009, respectively. Share-based compensation costs
capitalized as part of inventory were insignificant in all periods.
STOCK OPTIONS
Stockoptionsexpire10yearsfromthedateofgrantandvest
over service periods that range from six months to four years.
All options are granted at the average of the high and low prices of
the Company’s Common Stock on the New York Stock Exchange
on the date of grant. Under the 2005 Long-Term Incentive Plan,
the Company may issue up to 260 million shares of common stock.
Shares available for future grants under the 2005 Long-Term
Incentive Plan were 104.9 million at the end of 2011.
The Company settles employee stock option exercises with
treasury shares. Treasury shares are replenished throughout the
year for the number of shares used to settle employee stock
option exercises.
The fair value of each option award was estimated on the date
of grant using the Black-Scholes option valuation model that uses
the assumptions noted in the following table. Expected volatility
represents a blended rate of 4-year daily historical average volatility
rate, and a 5-week average implied volatility rate based on at-the-
money traded Johnson & Johnson options with a life of 2 years.
Historical data is used to determine the expected life of the option.
The risk-free rate was based on the U.S. Treasury yield curve in
effectatthetimeofgrant.
The average fair value of options granted was $7.47, $8.03 and
$8.35, in 2011, 2010, and 2009, respectively. The fair value was
estimated based on the weighted average assumptions of:
2011 2010 2009
Risk-free rate 2.41% 2.78% 2.71%
Expected volatility 18.2% 17.4% 19.5%
Expected life 6.0 yrs 6.0 yrs 6.0 yrs
Dividend yield 3.60% 3.30% 3.30%